What is a trade secret?
Trade secrets are related to intellectual property (IP) rights. The Trade Secrets Directive in the UK was implemented in June 2018 by the Trade Secrets (Enforcement etc) Regulations which state:
"Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:
(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
(b) has commercial value because it is secret; and
(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret."
The information designated as a Trade Secret may include formulas, practices, processes, designs, instruments, patterns, or databases of information. Some of this information may be patentable, or protectable by design rights, copyright or trademarks, however a decision has been made to retain the information in house and maintain its secrecy.
Most cases of trade secret leaks are not malicious. They stem from people who are keen, excited about new developments, wish to collaborate or hope to leverage the information for capital. This leads to secret information changing hands inappropriately and without commercial protections. Technical know-how is the most likely information type to flow out of the company. This can happen actively as the employee leaving the company can download data or remove information from the premises; accidently as they assume the knowledge they have is know-how when they move to a competitor; or passively, as when people retire, their knowledge lost.
Deciding what should be a trade secret
The disclosure of a Trade Secret could have a direct, negative impact on the business, typically seen as a financial impact on business growth, profit margins or the ability to leverage the information for capital.
A Trade Secret should be "secret" in the sense that it is known only to a limited group of persons, who have been read into the information, and have a legitimate need to know it. This naturally includes external stakeholders, however, internal company access should also be restricted. To ensure that reasonable steps are taken by the rightful holder of the information to keep it secret and protect the information, the processes allowing access to the Trade Secret should be subject to regular review, and will most likely require the use of confidentiality agreements for business partners and employees.
Therefore, while the trade secret is generally not known outside of the company, with specific Trade Secret clauses, and non-disclosure agreements (NDAs) in place, the information may also be sold or licensed to a third party.
Licencing and Monetising a Trade Secret
In a licensing scenario, it is most common that the Licensee wishes to know as much information about the scope of the information as possible, while the Licensor wishes to divulge as little as possible. Finely balancing the requests and expectations on both sides requires flexibility and strict terms and conditions, and it is unlikely that there will be a one size fits all answer to any licence agreement. Keep in mind how much it cost to develop the trade secret and whether having a product on the market would allow a skilled person to reverse engineer the trade secret.
Issues of Trade Secrets and Mitigation of Risks
The secrecy associated with a Trade Secret confers commercial value on the Trade Secret. However, its secrecy also makes it a challenge to find out if others have had access to the Trade Secret.
Some suggestions for risk mitigation may include:
Training
- Have a Trade Secret clause as a separate addendum of any license, employment contract etc. with its own NDA, so it doesn't get "buried" in the paperwork.
- Identify the Trade Secrets and define who has knowledge of the scope and access to the information. This may include named "owners" of the Trade Secret who are individually responsible for the distribution of the knowledge.
- Implement processes to ensure that access to the Trade Secret remains restricted and ensure parties to the knowledge understand the requirements placed on them to help maintain these restrictions.
- Define a minimum level of care required by those the Trade Secret is shared with e.g. items are never shared as email attachments which can easily be forwarded to others.
- Upgrading of IT systems and information tracking processes for example, requiring encrypted USBs and password protected documents which track the users and amendments in their metadata.
Scope
- Determine the type of Trade Secret you hold. If you plan to share it in-house or license it to a third-party interrogate whether it can be shared in a less risky way e.g. an output of federated learning rather than a raw data set.
- Define the scope of the Trade Secrets and require that it must be kept confidential in perpetuity. A suggestion may be to go so far as to draft a "patent-type" document, which explicitly defines the scope of the information, but is then kept as an internal secret. The detail of defined scope may serve to protect the information in an identified breach, as otherwise the scope will be determined during litigation.
- Indicate to the person signing the addendum that they are aware that there are civil / criminal liabilities associated with them receiving the trade secrets from the company.
Audit
- Perform ongoing audits to ensure the care is maintained.
- Perform a post contract audit to ensure any physical aspects of the Trade Secret i.e. notes, products, are retuned or destroyed
- Continue to discuss with the relevant parties whether the Trade Secret is still a Trade Secret. Specifically, over time has it retained its value both internally and externally, or has there been market developments which have affected its value.
Futureproofing
- If an employee is leaving the company, initiate garden leave proceedings as soon as practicable.
- Ensure that there can be information restitution in the event of a relationship breakdown. This may involve obtaining and retaining any documents or devices which the employee has access to. Audit the devices if there is a risk that they may have shared proprietary information.
- Alert the next company that the new employee is in possession of trade secrets, and indicate the general scope of the IP. Put them on notice that you will be monitoring their developments in that area to determine if there is misappropriation. However, you should always ensure that enforcing protection on your IP does not amount to bullying.
All IP types should be considered in a holistic manner to maintain the health of a business. Patents and Trade Secret are often seen as opposing forces, one being made public with a trade off for a monopoly right of up to 25 years, while the other being kept secret and theoretically lasting forever, however, they are extremely complementary forms of IP and should both be treated as valuable assets and protected accordingly.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
